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Thursday, May 03, 2007

A Replay Of 1987?

MarketWatch reports on currencies. "The dollar rose to a two-month peak against the yen and a one-week high vs. the euro Thursday, after a report showed the U.S. economy's non-manufacturing sectors grew at a faster-than-expected pace last month, easing some concerns about the fragile U.S. economic expansion."

"'Consolidation of short [dollar] positions ahead of tomorrow's non-farm-payrolls number remains the prevailing theme, as market players question whether U.S. sentiment has become overly pessimistic,' said Michael Woolfolk, senior currency strategist at Bank of New York."

"Late in New York, the euro traded at $1.3551 compared with $1.3592 late Wednesday, after touching $1.3544, the lowest level since April 23. The dollar was quoted at 120.37 yen, compared with 120.08 yen."

"The British pound traded at $1.9878 vs. $1.9890. The dollar also changed hands at 1.2161 Swiss francs, compared with 1.2136 francs."

"'The risk is that tomorrow's U.S. jobs data disappoints consensus estimates,' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. 'Nearly all the inputs economists use to arrive at a guesstimate have been weak.'"

The Dow Jones Newswire. "The U.S. dollar declined 1.1% on a trade-weighted basis in the first quarter of 2007 from the previous quarter, appreciating at the start of the period but reversing gains later on, the Federal Reserve Bank of New York said Thursday."

"U.S. monetary authorities didn't intervene in currency markets during the quarter, said William Dudley, executive vice president of the New York Fed, in the bank's quarterly report on Treasury and Federal Reserve foreign exchange operations."

"From late February until mid-March, global asset markets experienced a sharp repricing episode, during which the yen appreciated against the dollar and even more so against most high-yielding currencies, it said."

"Market participants cited 'concerns that weakness in the U.S. housing market, and developments in the subprime mortgage sector in particular, could reduce consumer spending and impact the broader U.S. economy,' it said."

The Financial Times. "Investors in US stocks have viewed the recent decline in the dollar as a green light to buy into large companies with international exposure. But analysts warn that a faltering currency looms as a double-edged sword for equity investors."

"'At some point, foreign investors will either hedge their US assets or repatriate,' says Dominic Konstam, head of interest rate strategy at Credit Suisse."

"So far, the dollar is seen to have made an orderly decline to compensate for a divergence between US and global growth rates. In the wake of last week's news that the US economy grew just 1.3 per cent during the first quarter, the dollar fell to a record low against the euro and multi-year lows against sterling and the Canadian, Australian and New Zealand dollars."

"This, analysts say, has encouraged local and some foreign investors to buy US stocks, which now look relatively cheap in their domestic currencies. 'The lower dollar has helped equities as the currency has adjusted for the slower economy and lower US investment returns,' said Mr Konstam. 'If the dollar doesn't fall, stock prices would come under pressure.'"

"While the dollar has fallen by about 2.75 per cent against the euro for the year to date, the Dow Jones Industrial Average is up 6.1 per cent and the S&P 500 is up 5.9 per cent. But if the dollar continues to weaken substantially, there will soon come a tipping point when foreign investors will no longer be satisfied with the returns from US assets."

"Jack Ablin, chief investment officer at Harris Private Bank, said he was 'a little worried about a replay of 1987 where the stock market kept going higher while the dollar quietly fell, adding: 'Eventually, investors stood up and noticed.'"

"The prospect of higher inflation beckons from a lower dollar, an outcome that, if accompanied by a slowly growing economy, represents the worst environment for stocks later this year, analysts say."

"The one factor keeping back the risk of a massive net selling of US stocks by foreigners is the weak yen, according to Mr Konstam. 'So long as the dollar is stable against the yen, the threat of such an outcome will stay contained. Dollar-Asia is a very important gauge of repatriation risk,' he says."

From Bloomberg. "Gold gained for the first time this week after Gold Fields Ltd., the world's fourth-biggest producer of the metal, said output declined at seven of its eight mines. Silver also increased."

"The Johannesburg-based company said today that its third- quarter production dropped 3 percent. Gold prices climbed 23 percent last year as global mine supply fell to a 10-year low, according to London-based GFMS Ltd."

"Gold for immediate delivery rose $2.20, or 0.3 percent, to $675.35 an ounce at noon in London, after declining $8.40 in the first three days of this week. Silver rose 11 cents to $13.325 an ounce, its first gain this week."